Working Paper: NBER ID: w2653
Authors: Jacob A. Frenkel; Assaf Razin
Abstract: The paper develops an analytical framework which demonstrates that the various forms of exchange-rate management are equivalent to corresponding tax policies. To highlight the salient issues, we consider two specific categories of exchange-rate policies. The first is a dual exchange-rate regime, which separates exchange rates for commercial and for financial transactions, and the second is a unified exchange-rate system in which the country unilaterally pegs its exchange rate at the same rate for all transactions. We show that the dual exchange rate policies can be usefully cast as distortionary taxes on international borrowing, and a unified pegged exchange-rate policies can be usefully cast as lump-sum tax cum subsidy policies. The equivalence between the various characteristics of exchange-rate management and tax management suggests that exchange-rate analysis could be usefully incorporated into the broader framework of the analysis of fiscal policies. A two-country model of the world economy is used to demonstrate the international transmission mechanism of these policies.
Keywords: Exchange Rate Management; Tax Policies; Monetary Policy; Fiscal Policy
JEL Codes: F31; E63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| dual exchange rate policies (F31) | distortionary taxes on international borrowing (F38) |
| dual exchange rate premium increases (F31) | distorts intertemporal prices (D15) |
| distorts intertemporal prices (D15) | influences consumption and investment decisions (E20) |
| unified pegged exchange rate policies (F31) | lump-sum tax cum subsidy policies (H23) |
| unified pegged exchange rate policies (F31) | affects overall wealth of the economy (F62) |
| changes in exchange rate management (F31) | impact the real economic system (F69) |